I've co-written 7 books on investments and personal finance with Ken Fisher, CEO of Fisher Investments, 5 of which were national bestsellers. I also led the development of the Fisher Investments On series, a collection of educational guides published by Wiley covering the primary investment sectors—from energy to consumer staples to health care—with in-depth analysis on the economic, political, and sentiment forces influencing each.

Hiring . . . Chicken or Egg?

Another day, another op-ed about how high unemployment is a hindrance to economic growth.

Make no mistake, unemployment is high—at 8.2% it’s still much above the long-term historical average. The official rate has been falling, but slowly. And that’s excruciating for the unemployed and underemployed.

But is high unemployment an economic hindrance? If it were, historically, high unemployment would lead to recessions consistently. And low unemployment would be a sort of self-perpetuating growth machine This is easy to check—plot unemployment against economic cycles (as Ken Fisher and I did in Markets Never Forget—or you can view something similar in this infographic).

But the data show it’s the reverse! Cyclically high unemployment has never led to a recession. Low unemployment has coincided with the start of every recession I can measure. This is no chicken-or-egg debate. High or low—unemployment is the effect of past economic conditions, not a precursor of future ones. That doesn’t change how personally challenging unemployment is. And it won’t stop politicians from crafting policies to “fix” unemployment (Lord save us). But it should underscore how frequently media reporting and economic reality are often miles apart.

And because headlines are near universally focused on how the unemployment rate is “too high”, what’s missed are the very real improvements in the employment market. For example, non-farm payrolls (from the BLS’s establishment survey) have grown an average 126,000 per month over the last 30 months and are now at 3-year highs. The establishment survey is fine, but tends to underreport new business ventures. Those tend to get captured under the household survey, which shows even higher employment growth over the past year.

Initial and continuing jobless claims are still high—but 50% below the 2009 peak, and at levels consistent with sustainable net job creation.

Some argue that the official rate is high enough, but that ignores discouraged workers, or those not consistently looking, or those working work part-time but want full-time jobs. Fair enough—there are myriad ways to measure unemployment (all fairly wonky). And yes, as you add in discouraged, marginally attached and underemployed, the unemployment rates rise (like the oft-cited U-5 and U-6 rates). But those figures are always higher than the official rate—often by a wide margin, even in the best of times. And they have never proven predictive of future economic direction, either.

Fact is, the economy doesn’t wait for unemployment to fall to grow. The economy grows—and that creates need for hiring. Here’s another way to see this: Unemployment is elevated, yet consumer spending is at all-time highs and has been for months. US (and global) GDP are at all-time highs. Business spending is near all-time highs, and yet, firms are still sitting on historical mountains of cash (thanks to 10—likely 11 including Q2—quarters of earnings growth). They won’t be content to sit on idle cash forever—it will be deployed—on mergers, acquisitions, new equipment, research, and, yes, hiring.

This constitutes the views, opinions and commentary of the author as of July 2012 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. No assurances are made regarding the accuracy of any forecast made. Past performance is no guarantee of future results. Investing in stock markets involves the risk of loss.

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